The U.S. Doesn’t Have Enough Available Rental Homes; the Solution? Build to Rent Homes!

build-to-rent

The Census Bureau says there are about 41 million renter households in the United States, a group making up about 35 percent of the country. And the renter ranks are expected to swell this decade as the housing demand of Baby Boomers and their children starts to converge. Twentysomethings who’ve been living at home during the recession will finally move out to form their own households. Many Baby Boomers, meanwhile, are expected to downsize into smaller rentals units where they won’t have to mow their own lawns.

Housing experts have projected that we may need to build at least 3 million new rental apartment units in the next 10 years to satisfy all these people. And if you’re a renter just about anywhere in the country, you may already be feeling the crunch: it’s lately become cheaper to buy a home than to rent one in the vast majority of America’s 100 largest metros.

This is a problem for young professionals and even decently paid ones trying to live close to jobs in expensive cities like New York and San Francisco. But America’s shortage of affordable rental housing trickles down with particularly depressing effects to the extremely low-income.

The Bipartisan Policy Center released a massive report recently on how we might restructure housing policy to better serve the country and brace against the kind of housing crash from which we’re still recovering.

In some markets, the report notes, strong competition for older units means that we may also wind up upgrading apartments once accessible to lower-income households with new amenities – expensive kitchen appliances, nicer bathrooms – that will only push those units permanently out of reach.

Another solution to this potential crisis is build to rent homes.  Homes that are built for rental, not only boost the real estate market and help investors, but get construction companies back to work.  To learn more about the build to rent home investment market, contact a member of the 9 Core Team.

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Why Build to Rent Works for Investors

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The buy-to-rent concept has been around many years with our brethren from across the pond, and now this investment mindset is gaining steam in the United States.

In Britain, what’s called “buy-to-let” is an investment strategy with a long history. It’s not uncommon for Brits to focus on rental home purchases as an investment, even before looking at stock and bond portfolios.

For Americans, stocks and bonds have been an integral part of investment planning for decades and, to be sure, they can be a great investment for wealth building. Real estate investment, particularly buy-to-rent investing, offers an excellent opportunity for investors to build wealth, save for retirement, and diversify their portfolios.

Individual investors smartly seized on the opportunity to buy low-priced homes in the wake of our nation’s housing downturn, but those without ready cash did not have the opportunity to fund new acquisitions or unlock equity from their existing real estate portfolio. Many of these purchases were turned into long-term buy-to-rent investments.

While rental investors now have some new and exciting financing opportunities available for buy-to-rent properties, some limits remain.

Freddie Mac only allows financing for up to four properties, and while Fannie Mae-approved lenders will occasionally lend on up to 10 investment properties it’s extremely difficult for most investors to qualify for financing on more than four homes. Hard-money lenders have funds readily available, but for a price. Some community and regional banks will consider investment property loans, but since so many got burned during the housing crisis, they are much more hesitant to lend today.

Buy-to-rent is a viable alternative for Americans who want to hedge their investment portfolios with a safe, conservative asset that should continue to garner a high rate of return. The 9 Core Realty team is excited to help both new and experienced investors that want to explore the unique investment opportunity from rental property investing.

 

Build to Rent Homes Offer New Opportunities for Investors

build-to-rent

Builders and developers will now start building more detached homes for rent. For years, home builders have ignored 10% of housing demand, allowing resale homes to fill the demand. Currently,12.7 million of today’s 120 million households rent a detached home.

44.3 million US rental households occupy:

  • 5 million individually owned rentals
  • 7 million detached homes (29%)
  • 8 million condominiums and townhomes
  • 8 apartment buildings
  • 2 million units in small apartment buildings (less than 10 units)
  • 6 million units in larger apartment buildings (10+ units)
  • 0 million mobile homes, boats, etc.

The 12.7 million detached home renters have largely been ignored by builders and developers for years as both supply and demand steadily grew over many decades. The vast majority of the growth of individually owned rental homes has historically come from households who lived in the home before relocating and decided to continue owning and renting the home rather than selling it. Approximately 54% of the landlords of single-family rental homes own only one home, per RentRange.

We have noted that even actively selling masterplans, despite not building single-family homes for rent, have a significant number of single-family renters. Just go into Zillow and look for yourself. The proactive developers are now looking to develop these neighborhoods and homes themselves, rather than letting others meet the demand.

This research, which was confirmed with the CEOs of several of the institutional investors, shows that these renters live in detached homes primarily because that is the preferred lifestyle. Most of them did not even consider renting an apartment. They prefer to live in a detached home and are renting either because of:

  • Necessity: They do not have the ability to qualify for a mortgage.
  • Flexibility: They choose to rent to maintain the flexibility to move.
  • Choice: They would rather spend what they earn today than save for a down payment.

Thus, single-family rental home competes more with the detached resale and new home market than with apartments.

Clearly, there is a subset of renters who will pay a premium to rent new, as evidenced by the 200K+ apartment units that are built and leased every year. If it works for apartment developers, why has there not been much attempt to build single-family homes for rent? Those days are now ending.

Here come the home builders, seizing the opportunity to build single-family detached homes to be sold to professional investors or to manage themselves. Consider the following:

  • Starwood Waypoint, an owner of 16,000+/- rental homes, has worked with 12 builders to buy homes from them. While they have often bought the slowest selling floor plan or the last few homes in a community, they are now actively pursuing new subdivisions in areas where they currently operate.
  • The CEO of American Residential Properties recently shared that their tenant profile has shifted as well, with new leases typically to young families with more than enough income to buy but who are choosing to rent primarily to have the flexibility to move.
  • Lennar has been a pioneer in detached subdivisions for rent with their Frontera community in a suburb of Reno Nevada. Rents for 1,210- to 2,182-square-foot homes range from $1499 to $1999 per month, or $0.92 to $1.20 per square foot, per apartmentguide.com.

Last year, approximately 25,000 detached homes were built for rent. Experts believe that number will increase significantly over the next several years and expect detached homes for rent to become an important segmentation opportunity for the top masterplans in the country, who will no longer ignore 10% of housing demand.  To learn more about investing in the build to rent market, contact a member of the 9 Core Realty team today!

Build for Rent Homes Gaining Market Share

Buld to Rent Homes

The market share for single-family homes built for the purpose of renting them out (rather than selling to an owner-occupant) is down from its peak reached in 2013, but in the last few quarters it has been trending upward.

The most recent New Residential Construction report from HUD and the U.S. Census Bureau, which measures quarterly housing starts and completions by purpose and design, found that single-family built-for-rent homes comprised 4.3 percent of all housing starts during the first quarter. That share is higher than the historical average of 2.8 percent but down from its peak of 5.8 percent which occurred in early 2013.

For the last four quarters, single-family homes built-for-rent have totaled about 32,000, according to the National Association of Home Builders (NAHB). That number has been on the rise—research indicated that approximately 25,000 single-family detached homes were built for renting in all of 2014.

Real estate industry experts feel the build-to-rent strategy is gaining popularity because it is more of a sure thing for investors. The base of it is truly to have a predictable asset that comes with embedded equity. Investors are also able to choose components of the home based on its desired use.

Because the homes are new, operational expenses, turn times, the cost of repairs and maintenance, and capital expenditures are all lowered through the lifestyle of the investment. In addition, builders select durable materials that can withstand tenant behavior.

With the onset of the Great Recession, the share of built-for-rent homes rose. Despite the current elevated market concentration, the total number of single-family starts built-for-rent remains fairly low in terms of the total building market. However, after falling during 2013, the market share has shown signs of gains over the past year.

The 2013 American Community Survey reported that the single-family portion of all rental housing stock in the country was 35 percent, with the built-for-rent share of single-family homes comprising a much smaller percentage. This is because single-family homes often transition to rental housing stock as they age. It is estimated that approximately 10 percent of single-family detached households (12.7 million out of 120 million) in the country are renting.

To learn more about the need for build to rent homes contact a member of the 9 Core Realty team today!